Financial accounting and reporting-1

Suggested Solution
Mock Autumn 2024

Answer 01

(a) Correcting Entries

Rs. in million
01-07-2016 Cash 50
Loan(W-1) 40.76
Govt. grant income (bal.) 9.24
(as all conditions are met
1-07-2016)

30-06-2016 Interest exp 4.48

(40.76 × 11%)
Cash 3
Payable 1.48

(w-1)
Cash received 50
Present value at market rate of interest 40.76
[50 × 6% = 3[1 – (1 + 0.11) -5] + 50 (1 + 0.11)-5]
0.11
Component of Govt. Grant 9.24
(b) Impact on:

Net profit Total Assets Total liabilities

As per question 125 1,420 925
Govt. grant 9.24 50 40.76
income
Interest expense (4.48) (3) 1.48
Revised amount 129.76 1,467 967.24

Answer 2
Dr. Cr.
Suspense A/c 180
Purchases 180
(2) Correction of amount posted to purchases a/c arising from transposition error
Cost of Sales 2,000
Stock 2,000
(3) Correction of overcasting of Inventory-Sheets
Suspense a/c 590
Cash a/c 590
(4) Correction of overstatement of cash in hand
Fixtures & Fittings 4,600
Suspense a/c 4,600
(5) Correction of omission from the trial balance of fixtures & fittings
 Inter Interest Expense A/C 1,200
Interest Payable 1,200
(6) Provision for interest due on loan not yet provided for [20,000 x 12% x 6/12]

(b) Suspense account

Rs. Rs.
Difference in TB 3,830 Fixtures & Fittings 4,600
Purchases 180
Cash 590

4,600 4,600

Answer 03
(a) Correction of error note:
It was identified in current year that an investment property was erroneously reported as property, plant
and equipment since acquisition i.e., 1 January 2018. The error has been corrected by retrospective
restatement of prior year amount, which has been summarized as follows:

Effect on the statement of profit or loss 2019 2018

Rs. in million Rs. in million

Reversal of depreciation 10 10
Increase in fair value gain on investment 22 20
property
Increase in profit 32 30

Effect on the statement of financial 2019 2018

position
-------- Rs. in million --------
Increase in investment property 242 220
Decrease in property, plant and 180 190
equipment
Increase in retained earnings 62 30
(466-404) (381-351)

(b)
Extract of retained earnings Rs. in million
Balance as at 31 December 2018 as reported 351
Effect of correction of prior year error (10+20) 30
Balance as at 31 December 2018 – restated 381
Final cash dividend for the year 2018 (15)
Total comprehensive income for the year 2019-restated 100
(68+10+22)
Balance as at 31 December 2019 – restated 466
Total comprehensive income for the year 2020 (82+10+24) 116
Balance as at 31 December 2020 582

Workings:
 Date Accounting head Debit Credit
1.01.2018 Investment Property 200
PPE 200

31.12.2018 Accumulated Depreciation 10

Depreciation 10
(200/20)
31.12.2018 Investment Property 20
Gain (P/L) (W-1) 20
31.12.2019 Accumulated Depreciation 10
Depreciation 10

31.12.2019 Investment Property 22

Gain (P/L) (W-2) 22

31.12.2020 Accumulated Depreciation 10

Depreciation 10
31.12.2020 Investment Property 24
Gain (P/L) (W-3) 24
W.1)

31.12.2018
WDV 200

Fair Value 220 (200 × 1.1)

Gain 20
W.2)

31.12.2019
WDV 220
Fair Value 242 (220 × 1.1)
Gain 22
W.3)

31.12.2019
WDV 242
Fair Value 266 (242 × 1.1)
Gain 24

Answer 04
LH SPORTS CLUB
(a) Surplus for the year
Rs. Rs.
Surplus per draft income and expenditure account 23,655
Add capital expenditure 4,000 Cr.
Deduct depreciation
Premises (80,000 x 20%) 1,600 Dr.
Furniture (18,000 x 10%) 1,800 Dr.
Equipment (4,000 x 20%) 800 Dr.
 Less 80% joining fee [17,800 /5 x 4] 14,240 Dr.
Less subscriptions in advance 960 Dr.
Add: subscription outstanding 300 Cr.
New surplus for year 8,555

Accounting entries:
Debit Credit
Equipment 4,000
Equipment cost expense 4,000
Joining fee income 14,240
Joining fee fund (17,800/5 x 4) 14,240
Subscription income 960
Subscription in advance 960
Subscription receivable 300
Subscription income 300

Answer
5 (a)

Profit earned by the entity 550,000

Opening equity balance 1,500,000
Specific price indices 15%
Inflation adjustment (225,000)
Profit earned under physical capital maintenance 325,000

5(b)

Profit earned by the entity 480,000

Opening equity balance 1,100,000
Specific price indices 12%
Inflation adjustment (132,000)

Answer 06 MCQs:
(i) (b) Rs. 35 million [120 – 15] ÷ 3
(ii) (a) Any restrictions on the distribution of the revaluation surplus to shareholders
(iii) (a) Physical capital maintenance
(iv) (d) Property transfer taxes
(v) (b) Gain of Rs. 8 million Loss of Rs. 2 million
(vi) (c) Profit for the year
(vii) (a) Over-statement of closing inventories
(c) Inclusion of disposal proceeds of non-current assets in sales
Answer 07

Ratios 2018 2019

Current ratio 1.25 times 1.20 times
Acid test ratio 0.46 times 0.40 times
Average Collection period (days) 22 days 27 days
Inventory turnover (days) 45 days 60 days
Long-term debt to equity (based on capital 32% 32%
employed)
Gross profit margin 16.28% 13.16%
Net profit margin 4.65% 2.63%
Return on capital employed 21.05% 10.52%
Return on assets 13.38% 6.14%

Analysis:
The Company’s profitability has declined steadily over the years. As only Rs. 50,000 is added to
retained earnings, the company must be paying substantial dividends. Receivables are going slower,
although the average collection period is still very reasonable relative to 30 days terms given in
question. Inventory turnover days are increasing as well, indicating a relative buildup in
inventories. The increase in receivables and inventories has increased the total assets, which results
in a decrease in return on assets. Return on assets has also decreased because of decrease in
profitability over the years.
The current and acid test ratios have decreased slightly. The lack of deterioration in these ratios is
due to relative build-up in both receivables and inventories, evidencing deterioration in the liquidity
of these two assets. Both the gross profit and net profit margins have declined substantially. ROCE is
declining due to a decrease in profitability. In 2019, sales have also decreased significantly despite
the increase in debtors.
The debt equity ratio is unchanged as there is no change in capital structure.

Conclusion:
The main problem that the company is decreasing sales and increasing in balances of inventories
and debtors
 Answer 08
Mingora limited
Notes to Financial
Statements For the
year ended 31-12-
2019

Property, Plant and Equipment:

Plant Vehicles
Rs in millions

Gross Carrying Amount:

Opening balance (W 1) 360 170
Elimination (60) -
Revaluation (10) -
Closing balance 290 170

Accumulated depreciation and

impairment:
Opening balance - 45
Depreciation (W.1)/ (W.2) 60 21
Elimination (60) -
Impairment loss 7 -
Closing balance 7 66
Carrying Amount 283 104

Disclosures:

Plant Vehicles
Measurement Basis Revaluation Model Cost Model
Useful life/Rate 7 years 16.84% (W 2.2)
Method of Depreciation Straight Line Reducing Balance

The last revaluation was performed by Muhammad Ahmad Malik & Co. on 31-12-2019, an
independent firm of valuer. Had the land and building been at cost model, carrying amount
would have been:

2019 2018
Cost 434 434
Accumulated depreciation [434/7 x 2]; (124) (62)
[434/7 x 1]
310 372
Impairment loss [310-283 (W.3)] 27 -
Carrying amount 283 372
 W.1 Revaluation of plant

Date
1.1.2018 Cost (375+59) 434
31.12.2018 Depreciation (434/7) (62)
31.12.2018 Carrying amount 372
31.12.2018 Revaluation Loss (bal) (12)
31.12.2018 Fair value 360
31.12.2019 Depreciation (360/6) (60)
31.12.2019 Carrying amount 300
31.12.2019 Revaluation Loss (bal) (10)
31.12.2019 Fair value 290

W.2 Depreciation of Vehicles:

For 2018: [170-10] / 16 (W 2.1) = 10

For 2019: 125 x 16.84% (W 2.1) = 21
(W 2.1) useful life of vehicle:
[170-10] / life x 3.5 = 35

Life = 16 years
(W 2.2) vehicle depreciation rate when estimate is changed in 2019:
WDV 170-35-10 = 125

Remaining life = 16 - 3.5 - 1 = 11.5

Method is now reducing balance so rate is required

15
.

= [1 −11.5 ] × 100
125

= 16.84 %
W.3 impairment loss:

Carrying amount of machine = 290

Recoverable Amount:
Higher of:
FV less CTS

(290 – 10) 280

Value in Use (W) 283

283
Working: Value in use
88 x (1 + 0.1) -1 = 80
82.28 x (1 + 0.1) -2 = 68
 73.21 x (1 + 0.1) -3 = 55
65.81 x (1 + 0.1) -4 = 45
56.37 x (1 + 0.1) -5 = 35
Total = 283

Movement in Capital Work in process – investment property

2019 2018
Balance as on 01.01 90 40
Expenditures 30 50
Borrowing cost capitalized (W) 4
Transferred to investment (60)
property
Balance as on 31.12 64 90

(W) Borrowing cost capitalized

100 x 12 % x 7/12 = 7
Less: [100-30] x 7.35% x 7/12 = (3)
4

Answer: 9

Spring industries limited

Statement of cash flow
For the ended 30 Jun, 2021

Rs’000’

Cash flow from operating Activities

Profit before tax 2100

Finance cost 600

Depreciation for the year 1,250
Loss on revaluation of PPE 1,000
Income from government grant (200)
Fair value change 700
Gain in disposals (1800-1600) (200)
Bad debts (20)
Rental income of investment property (150)

5080

Operating profit before working capital changes

Decrease in inventory (3100-2300) 800
Decrease in Gross trade debtors (3400-3000) 400
Decrease in trade payables (500)
Increase in accrued expense 300

Cash generated from operation 6080

Interest paid (600+50 -100) (550)
Income tax paid (900)

Net cash flow from operation activities (A) 4630

Cash flow from investing activities

Disposals proceeds from PPE 1800
Acquisition of PPE (5950)
Purchase of investment property (200)
Investment property rent received 150
Net cash flow investing activities (b) (4200)

Cash flow from financing activities

Proceeds from issue of shares (3400+500) 3900
Dividend paid (3830)
Repayment of loan (1000)

Net cash flow from financing activities © (930)

Net cash flow (A+B+C) (500)

Net decrease in cash $cash equivalent during the year (500)

Opening balance of cash $cash equivalent 300
Closing balance of cash$ cash equivalent (200)

Working
Long term loan Deferred Govt grant
Bal 1000 b/d 6000 Income 200 b/d 1000
(5000+1000)
c/d 800
c/d 5500 (600+200)
(4200+800)

PPE
Tax payable
Cash 900 b/d 8500 b/d 25,200 disposals 1600
(4 x60%)
Expense 500 cash 5950 Rev loss 2500
c/d 450 investment property 1600
payable 500 Dep 1250
c/d 24,700

Investment property Share capital

b/d 5000 FV loss 700 b/d 10,000

Div 1000
PPE 1600 cash 3400

Cash 200 c/d 6100 c/d 14,400

 Share premium Rev. surplus

b/d 2,000 PPE 1500 b/d 1500

Cash 500

c/d 2,500 c/d -

Debtors Provision
b/d 170
b/d 3400
(3,230/95x100) 400
Bad debts 20

c/d 3000 c/d 150

(2850/95 x100)

Retained earing

b/d 11530
Dividend 1000
(10,000x10%) PAT 1600
Cash 3830

c/d 8300